Strong Insider Buying Heralds Bull Market

October 19, 1986|By DAN DORFMAN, News America Syndicate

``It`s one of the biggest buying outbursts in the past 20 years,`` says Norman Fosback, editor of The Insiders, a bi-weekly investment newsletter out of Fort Lauderdale, which tracks the buying and selling of officers and directors in their own companies` shares.

From Ed Buck, editor of Vickers Weekly Insider Report of Brookside, N.J.: ``Insiders are buying like there`s no tomorrow. The signs are definite: The bull is back, and the market consolidation is in its final stages before stock prices embark on a major new upswing.``

The rosy findings of the two veteran Wall Streeters are especially relevant since they signal that the smartest stock investor around -- the corporate insider -- has gone on a buying binge despite an erratic, perplexing market environment. And he`s doing it in practically record proportions.

The signficance to Buck is unmistakable. When insiders buy stocks en masse, they`re practically 100 percent on the money in signaling higher stock prices. On the sell side, when they act in concert, they`re about 85 percent right.

Normally, insider selling is double the amount of insider buying, chiefly because options and stocks are often part of the salary and bonus packages of key employees. So when the number of sales exceeds the number of purchases by more than a 2-1 margin, that`s bearish. When the selling falls below 2 to 1, that`s usually bullish. And the latest numbers from our two insider experts are resoundingly bullish.

First to Vickers, which has been tracking insider activity since 1970. It recently amended the firm`s buy-sell ratio to reflect what it regards as a more realistic formula -- specifically a change to 2 1/2 sales for each buy. The reason for the change: the growing number of options being issued by corporations, thus increasing the amount of stock insiders have to sell through the excercise of such options.

Vickers measures insider activity on a weekly basis and on an eight-week moving average. The latter rules out the peculiarities of an unusually larger or smaller amount of buying or selling in a one- or two-week period. For both periods, the figures are impressive.

For example in the week that ended last Wednesday, the ratio of sales to buys was 1.18 to 1 -- which Buck describes as ``fantastically bullish.`` He observes that a buy-sell ratio of just 1.5 to 1 is in itself ``a mandatory buy signal`` for investors.

Buck recollects that the last time the sale-buy ratio was at roughly current levels was early last December, when it was 1.08 to 1. The Dow at the time was about 1,485. By the following June, it had shot up above 1,900.

To show the insider`s uncanny ability to call the market, Buck observes that in the middle of last June -- with the Dow at 1,861 -- insiders flashed a clear sell signal by dumping 5.3 shares for each share they bought. Three weeks later, the Dow had tumbled to 1,774.

On an eight-week moving average, Vickers buy-sell ratio currently stands at 2.03 to 1, the lowest level since September 1985.

The Insiders has just completed its Flash Insiders Index, a survey of the latest reported trades over the past 30 days. Normally, Fosback tells me, the ratio is 35 percent buyers, 65 percent sellers. However, the latest figures show buyers actually outpacing sellers -- 58 percent versus 42 percent. That`s the most favorable level since November `85 -- right around the time the market launched its rally from about the high 1,200s to the 1,900s.

``It`s one of the best buy signals in the past 20 years,`` says Fosback, who predicts the Dow will hit new highs before year-end and reach 2,200 in the first half of `87.

The stocks showing the best buy signals, according to The Insiders, are sugar, savings and loans, airlines, real estate investment trusts (REITs) and banks, chiefly regionals. The worst are said to be drugs, aerospace, packaged foods, publishing and broadcasting.